IPO Preview: Semler Scientific

Based in Portland, OR, Semler Scientific (NASDAQ:SMLR) scheduled a $15 million IPO on the Nasdaq with a market capitalization of $62 million at a price range midpoint of $13 for Friday, February 14, 2014. Update: SMLR price range lowered to $7.50-$9.50. The conclusion remains the same.

Valuation

Conclusion

The rating on SMLR is neutral but with a watch.

The stock market likes recurring lease revenue, and SMLR appears on its way to developing a meaningful recurring revenue stream. If SMLR can approach break even then company's stock will be a lot higher.

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

SMLR is an emerging medical risk-assessment company, with a device that measures blood flow at the extremities.

SMLR has one patented and FDA cleared product, FloChec™, that is marketed and lease to customers.

SMLR began commercially leasing FloChec™ in January 2011.

FloChec™

FloChec™ is a four-minute in-office blood flow test. Healthcare providers can use blood flow measurements as part of their examinations of a patient's vascular condition, including assessments of patients who have vascular disease.

FloChec™ is used in the office setting to allow providers to measure arterial blood flow in the extremities and is a useful tool for internists and primary care physicians for whom it was previously impractical to conduct blood flow measurements.

FloChec™ received FDA 510(k) clearance in February 2010, SMLR began Beta testing in the third quarter of 2010, and it began commercially leasing FloChec™ in January 2011.

Intellectual property

SMLR has been issued one patent for its apparatus and method, U.S. Patent No. 7,628,760, which expires December 7, 2026. Three other U.S. patent applications are pending. Other patents are in process.

FloChec™ received FDA 510(k) clearance in February 2010 as a Class II Medical Device. Advanced Vascular Technologies, an entity formerly affiliated with SMLR's founder and Chairman, Dr. Semler, applied for and obtained for the 510(k) clearance.

However, any interests it may have had in such 510(k) clearance were subsequently assigned to SMLR and it did not manufacture any products for its company. The Class II Medical Device designation means that FloChec™ is a commercial device and is currently being sold in the United States. Class II devices are subject to FDA's general controls, and any other special controls as deemed necessary by FDA to provide reasonable assurance of the safety and effectiveness of the device.

Competition

The principal competitor for FloChec™ is the standard blood pressure cuff ankle-brachial index, or ABI, device.

FloChec™ does not include a blood pressure cuff. SMLR is not aware of another product that performs digital ABI without the use of a blood pressure cuff.

There are several companies that manufacture the traditional ABI device, which range in price from $2,500 to $20,000. Some of these companies are much larger than SMLR and have more financial resources and their own distributor network.

5% stockholders

GPG SSF Investments​ 10.2%

Eric Semler​ 18.6%

Dr. & Mrs. Semler​ 26.8%

William H.C. Chang​ 31.1%

Dinesh Gupta​ 5.5%

Dr. Douglas Murphy-Chutorian​ 8.4%

Use of proceeds

SMLR expects to net $12.82 million from its IPO. Proceeds are allocated as follows:

working capital and general corporate purposes.

54% of the proceeds to invest in SMLR's sales and marketing efforts to commercialize its product, and use 32% for general and administrative expenditures, including addressing compliance with U.S. public company requirements, such as hiring additional personnel and investing in SMLR's corporate infrastructure.

Disclaimer: This SMLR IPO report is based on a reading and analysis of SMLR's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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